Chapter 2 - Planning and risk assessment Flashcards
What are the two preconditions of an audit engagement that have to be met?
1) Determine whether Financial Reporting framework to be applied in the preparation of the FS is acceptable: Ask mgmt what framework is, review past FS to corroborate, Consider any relevant law/regulation applying to company
2) Obtain agreement of mgmt that acknowledges its responsibility for the preperation of the FS: sufficient internal controls, provide auditor with access to all information required (should be confirmed by company being audited in writing, written respresentation)
What does an engagement letter provide?
A written agreement between the auditor and the client
When should an engagement letter be sent?
Before the start of the audit
When should the engagement letter be updated?
1) Changes in law
2) Changes in regulations and standards or changes in the client or if there is evidence that the client does not understand the nature of the audit relationship
What does an engagement letter typically contain?
1) Objective and scope of the audit of FS
2) Mgmt responsibility for FS and maintaining effective internal control
3) Auditors responsibilities
4) Access to whatever records, documentation and other information requested in connection with the audit
5) Arragements for audit planning
6) Agreement for mgmt to provide letter of representation
7) Basis on which fees are computed and any billing arrangments
The audit engagement partner is responsible for 6 points relating to compliance with ethical requirements?
1) Understanding the ethical requirements associated with engagement
2) Alterting the other members of the team to the requirements
3) Evaluating any threats which arise
4) Staying alert for any breaches
5) Acting if made aware of any breaches
6) Taking responsibility that the ethical requirements have been met, prior to signing the audit report
The audit engagement partner is responsible for 3 points relating to compliance with engagement resources?
1) Ensuring sufficient and appropriate resources assigned to the audit
2) Ensuring members of the engagement team have appropriate competence, capabilites and time
3) Taking timely action if the above requirements are not met
How should an engagement partner help direct the engagement team?
By hosting an engagement planning meeting where it is communicated to the team:
1) Their responsibilities
2) Objectives of the work they are to perform
3) The nature of the client’s business and any significant issues for the year
4) How to deal with any problems that may arise
5) Detailed approach to performance of the audit
When reviewing audit work, what should the reviewer consider?
1) Work done in accordance with firm’s procedures and auditing standards
2) Work is sufficiently documented to allow conclusions drawn
3) Significant audit matters have been raised for further consideration
4) Objectives of audit procedures have been achieved
5) Conclusions are consistent with all work performed
What should the engagement partner carry out an overall review on?
The workings papers, significant matters and significant areas of judgements and he should be satisfied that there is sufficient appropriate evidence
What is a cold review?
An audit firm carrying out periodic inspection of completed engagements - to be carried out by a senior partner
What can an audit partner do if faced by difficult or contentious matters?
Consult a professional outside engagement team/audit firm.
Should document results of consultation and ensure results are implemented.
In modern day auditing, what approach do auditors take to their work?
Risk based approach
What 4 things does a risk based approach help auditors to?
1) Identify main risk areas early in planning stage
2) Base the audit plan around those risks
3) Carry out efficient audit that minimises audit risk and detection risk
4) Reduce chance of negligence claim
6 Benefits of planning the audit of FS?
1) Help auditor to devote appropriate attention to important areas
2) Resolve potential problems on timely basis
3) Assist in appropriate selection of engagement team members
4) Directing and supervising engagement team
5) Assisting with coordination of work done
6) Develop an audit strategy
What 4 factors influence an audit strategy?
1) Size of the client
2) Auditors familiarity/history with client
3) Complexity of audit
4) Specific reporting requirements (tight deadlines)
What must an audit strategy cover?
1) Characteristics that define it’s scope
2) Reporting objective of engagement to plan timing of audit and nature of communications
3) Factors that are significant in directing audit teams effort in professional judgement of auditor
4) Results of preliminary engagement activities and relevant past knowledge of client
5) The nature, timing and extent of resources necessary to perform engagement
How can an auditor gain an initial understanding of a client?
1) Obtaining latest FS and performing analytical review
2) Request feeling with mgmt and internal audit team
3) Internet searches
4) Requesting permission to meet with current auditors
What 4 things must be considered when performing risk assessment procedures?
1) Organisation structure, ownership & governance, business model, including extent to which business model integrates use of IT
2) Industry, regulatory and other external factors
3) Measures used, internally & externally to assess entity’s financial performance
4) Applicable financial reporting framework, entity’s accounting policies and reasons for any changes in these
What is an audit risk?
Auditor giving incorrect opinion on FS and is calculated by inherent risk * control risk*detection risk
What two factors of audit risk are outside the control of the auditor?
Inherent risk and control risk (material misstatements exists in FS)
What audit risk factor is within control of the auditor?
Detection risk - auditors do no discover existing errors.
What is inherent risk faced by the auditor and 5 examples of qualitive factors that are included?
Assertations about class of transactions, account balance or disclosure is susceptible to material misstatement
1) Complexity
2) Subjective judgements
3) Change
4) Uncertainty
5) Susceptibility to management bias
What is control risk?
material misstatement could occur in assertion about class of transaction, account balance or disclosure will not be prevented, or detected and corrected on a timely basis by entitys internal control system
Could be higher if company recently installed new computer system or high staff turnover
